Stakes higher for new oil projects as investors bet on price recovery
As crude oil prices looks to hover around $50 per barrel far longer than necessary, the stakes for new projects are getting higher. Crude oil inventories have seen upswings and downswings making it increasingly difficult to forecast.
The American Petroleum Institute (API) reports a surprise build of 3.097 million barrels in United States crude oil inventories, compared to an S&P Platts’ survey of analysts that expected inventories would draw down by 400,000 barrels for the week ending October 6 says Julianne Geiger, researcher for US-based Divergente LLC consulting firm, and a member of the Creative Professionals Networking Group.
However, prospects for next year do not look very promising either. The International Energy Association (IEA) said demand for OPEC oil would be 32.5 million barrels per day next year – around 150,000 bpd lower than the group pumped last month.
OPEC on the other hand is quite optimistic. The oil cartel expects its efforts to clear the surplus in oil inventories to finally succeed by the end of the third quarter of next year.
OPEC member countries and non-OPEC producers including Russia have been cutting oil production this year to bring fuel inventories in industrialized nations back in line with the five-year average. They hope to end an unprecedented build-up that sent prices plunging from above $100/bbl in 2014 to around $50 currently, but the process has not turned out quite as planned.
In this environment, investments in new projects have been quite few and far between. Analysts say the global economy is on the cusp of recovery and the markets are starting to work through the glut of crude oil, but exploration and production companies are not still hesitant about spending.
Currently there are over $30 billion worth of projects in the Gulf of Mexico which are yet to be developed and many others in the Sub-Saharan. The challenge is what price would be most cost effective for new projects and what location presents the most beneficial investment climate.
“Depending on who you talk to, whether you need $50 oil or $60 oil, that’s really the next phase of spending in the offshore environment. We have almost $30 billion in activity that is sitting on the sidelines waiting for commodity prices to recover and actually stabilize,” Chris Paschall, vice president of research, oil and gas for the market research firm Industrial Info Resources told Reuters. “So there is hope here. I just think it’s going to take a little longer than what we were probably anticipating.”
Paschall said by the end of 2017, $13 billion worth of projects will be online in the Gulf, producing 436,000 barrels of oil each day. But that increase may not be enough to replace the amount of oil coming out of the Gulf, so overall production could fall in 2018.
In the current low-price environment, unlike what took place when oil was $100 a barrel, there’s not much in the way of “wildcatting,” or drilling in areas with no history of production, Paschall said.
While the stakes for new projects are high on their own, Nigeria presents a compounding of the project with the country’s inability to pass critical petroleum Industry regulation that will clarify fiscal rules and create new path for investments.
There are indications that if crude oil moves to stabilise at $60 which looks like a real possibility, assuming OPEC deal holds and shale oil production within bounds, investors will scramble to snap up new assets. The countries with the best regulatory and fiscal conditions will attract investments.
ISAAC ANYAOGU